A final factor that may have helped prop up the euro over the past year is a measure of blind confidence that European politicians won't be stupid enough to let the euro fail. Though the past month marked a significant erosion of confidence on this front -- investors recently turned the other way at auctions of ten-year Belgian, French, and German bonds -- last week's equity rally suggests that many people still think that all will end well. All eyes are on Friday's EU summit, which analysts say could be one of the last, best opportunities to save the euro.
What's next for the euro
It's hard to have perspective in the midst of a storm, but one thing is for certain: everyone is a bear right now when it comes to the eurozone. The die-hard bears believe that the eurozone's structural and political problems are too big to solve and that the euro will suddenly dissolve in the next few weeks. Less dramatic bears think that after a few recessionary years, Italy, Spain, and Greece will exit the euro, leaving the stronger countries bound together. The more optimistic bears hope that the European Central Bank will step up and buy up bad debt from Spain and Italy, which will allow politicians to negotiate their treaties and change statutes to bring Europe fiscally and thus ideologically closer together, with Germany at the helm.
In a way, a tighter fiscal union would represent the euro coming full-circle: from its origins as a political union, to a more narrowly defined monetary one, and back to a political union. This is a frightening prospect for the region's smaller states, which fear an erosion of sovereignty. Yet it is likely needed now if the region is to retain its common currency.
As for the resilient euro, its near-term future will likely hinge on the strength with which ECB leaders declare their willingness to act now. A firm commitment, traders say, could keep the currency within its five-year trading band. Empty rhetoric, on the other hand, could cause it to finally crater.
